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Emerging Markets: Middle East

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The repercussions from the debt-standstill by investment company Dubai World will be felt for months, if not years, to come. Moody’s Investors Service on December 10 downgraded the ratings of three top Dubai-based banks, saying that their exposure concentrations to the construction and property sector, as well as Dubai government-related entities, are significant and could entail material losses. The ratings agency said negative investment sentiment triggered by the Dubai World restructuring could have longer-lasting effects on Dubai’s economy and could constrain the banks’ ability to access the debt markets in a cost-effective manner for longer than was previously expected.

At the very least, the financial crisis that has rocked world markets and the more recent default debacles in the Gulf could spark a long-needed wave of bank mergers, as financial institutions seek to cope with the stricter capital-adequacy requirements imposed by the UAE central bank.

The reputation of Dubai as a world financial center could also be affected by the lack of disclosure in the emirate (and elsewhere in the region) and the criticism of bankers, who were told they share the blame for lending based on a dream. The surprise removal by decree of Omar bin Sulaiman as governor of the Dubai International Financial Center (DIFC), just days before the Dubai World news broke, raised questions about the future direction of the DIFC, which ironically has succeeded handsomely as a real estate proposition.

Elsewhere in the region, Jordan’s King Abdullah appointed Samir al-Rifai, a former aide, to become the country’s prime minister. The move came two weeks after the king dissolved parliament halfway through its four-year term. Al-Rifai was asked to form a new cabinet to push through economic reforms before elections that are due this year.